Banks and Growth: Looking beyond Cost Cutting: Banks Cannot Rely on Expense Control to Grow the Retail Arms of Their Businesses. They Also Must Better Use Their Resources, Especially People, on Hand
O'Connell, Bryan, Journal of Banking and Financial Services
Banking has been through some dramatic changes over the last decade, perhaps the most far reaching in the history of the industry. The banks have been forced to think very hard about almost every aspect of their business, especially in terms of improving performance and core competencies.
In recent times banking businesses have become more difficult to manage, given the uncertainty and volatility of world financial markets and related factors such as terrorism, the war in Iraq and the SARS outbreak.
Many of the forces that have driven change over the last decade are still at work, such as the impact of technology, e-commerce and globalisation. New challenges, however, are also emerging.
Cost cutting not the answer
Having focused on their core competencies to substantially improve performance, the banks are now realising they need to find new paths of growth and strategies as home markets mature, competition intensifies and more immediate consolidation opportunities evaporate.
Banks are also being forced to face making difficult choices about what type of business models best suit their needs and capabilities in terms of product manufacture, distribution and administration.
Many banks have cut costs to the point where this process is reaching its limits. The cost to income ratios of the major Australian banks have reduced from the mid-60 per cent range over five years ago to the mid-40s for the best exemplars and to the low 50s for the laggards.
Some have not been as successful at managing down their expenses and can do more in this area, while for any bank CEO watching costs is an ongoing exercise.
However, cost cutting one's way to improved performance is no longer seen as a viable strategy. At worst, management risks eroding the value of their business through imprudent slashing and burning.
There is a growing need to improve marketing, selling and distribution power in order to grow revenue, as well as a need to create more innovative product solutions for customers.
At the same time, competition is intensifying at a rapid rate. Some examples include banks looking to grab a bigger share of lending in the small to medium size enterprise market, where price and service issues make customers vulnerable to switching or extending their banking arrangements.
In consumer banking, the credit card market is shaping up as another battleground based on price, loyalty awards and more new entrants. Non-banks like the giant GE Capital are using their muscle to create a potential nightmare for banks in areas such as consumer finance and alliances with giant retailers (Coles Myer in the case of GE Capital).
Virgin Money is also making inroads with its new credit card and is another example of a non bank threatening a lucrative cunsumer market of the banks.
Global banks are either expanding their international operations through further acquisitions, or are posing greater threats to local banks in established markets through niche product and service offerings where they can leverage their global scale and experience.
Bank management is facing more change in terms of work cultures, structures and the use of technology than they have ever experienced. People management, which is dealt with separately, is a critical component of this process and a major determinant of how successful an organisation will be at managing change.
CEOs, along with their senior executives, need to be bold, be different and prepared to try more innovative approaches to maximise and harness their bank's infrastructure and resources.
As well as being able to react quickly to developments, management also needs to anticipate developments and have alternative strategies in place; for instance for dealing with a downturn in interest rates and the housing market. …